Strong price rises for Swedish housing market, but some nervousness

The Swedish property bull market continued even stronger in 2006. House prices rose by 11.37% in 2006, higher than the 9.63% rise in 2005, thanks continued strong Swedish GDP growth.

Stockholm’s strong house prices performance has been particularly striking, and the country’s three major metropolitan areas all experienced strong increases in prices – Stockholm (12.77%), Göteborg (10. 50%), and Malmö (13.53%).

Despite the strong y-o-y price rises the last two quarters were weak (quarterly house price rises of 0.68% in Q4 2006, and 0.90% in Q1 2007). Most probably this is a seasonal irregularity, slight variations are not at all unusual. But on the other hand, it could be the start of something deeper.

Around 29,832 new dwellings were completed in 2006, considerably up on 2005’s 23,000 new dwellings, and a significant rise from the 12,000 average annual completions from 1995-2000.

The new government may reform the rental market

There is no buy-to-let market in Sweden. The Swedish rental market is strictly regulated. Rent controls and tax rates mean it is unprofitable for individuals to buy to rent.

A large part of the sector is publicly-owned through property companies controlled at the municipal level. The number of municipal dwellings is however being reduced at a faster rate than new units are established. Eight per cent of the Swedish population is queueing for a new apartment, with an average waiting time of 10 years.

Lately there has been a trend to convert public housing into private property. Nevertheless, quasi-ownership rights for tenants coupled with the legal design of lease contracts have barred the emergence of a proper rental market. Consequently, housing is bought for occupation, not for renting.

Rents in Sweden are largely historic cost-based, and reflect the age composition of the social housing stock. Swedish law requires that rent-setting be negotiated between tenant organizations and municipal housing companies (MHCs) or private landlord organizations.

Private rents, in the negotiation process, are compared to social housing rents, which leads to rent conformity across tenures. This rent-setting structure means that in attractive central urban locations, rents are often well below market levels. This limits the profitability of private rental markets. Thus, the private rental sector has declined significantly over the past two decades.

However all this may soon change

The Alliance for Sweden, a centre-right coalition headed by Moderate Party leader Fredrik Reinfeldt, unseated the Social Democrat Party of Goran Persson in elections in September 2006.

The housing system has been high on the agenda since the electoral victory, and an ongoing state review of the system argues for the removal of the current rental ceiling, with private housing companies no longer bound by rent levels set in the public sector.

Interest rates have been getting higher

Swedish interest rates have followed those of the European Central Bank upward. The Swedish Krona has very broadly shadowed the Euro since 2001. The Riksbank has moved the repo rate up twice in 2007, the latest upward move being on 27 July, when the rate moved to 3.5% The record low was the 1.5% rate in effect from July to December 2005. Mortgage rates are marginally higher than the repo rate.

The rate of increase in lending to households for housing purposes, i.e., mortgages, has been slowing – up 12% y-o-y to June 2007, compared to the 15% increase y-o-y to June 2006.

Lending for mortgages in Sweden has traditionally been predominantly fixed-rate, rather than floating rate. The share of households who have taken loans with a fixed interest rate, for all purposes including non-housing loans, rose to 53.10% in May 2007, compared to a mere 38.90% of households who chose to fix the interest rates on their loans in May 2006. This dominance of fixed-rate loans cushions the housing sector against sudden interest-rate fluctuations.

Strong economic growth

Sweden’s economic growth remains very strong, with 3.6% y-o-y GDP growth to Q2 2007. Partly as a result of market-oriented reforms introduced by the Socialists, Sweden has experienced consistent growth since 1997, growing annually at a rate of 3.3% until 2000.

The global downturn after 9-11 in 2001 hit both domestic demand and exports, and that year, the Swedish economy grew by only 0.9%. By 2002 the economy recovered to 2.1%, but slowed down again by 1.6% in 2003.

Strong growth in IT and telecoms pushed the 2004 growth rate back to 4.1%, but there was then a moderate slowdown in 2005 to 2.9% growth, followed by last year’s recovery.